It’s always worth keeping an eye on the earnings forecasts for your favourite companies, especially if you use forward price-to-earnings (P/E) ratios to gauge when to buy and sell your shares.
If City brokers have been revising their projections of late, your investments may not be as cheap — or expensive — as you think!
Today I’m looking at the earnings per share (EPS) forecasts for AstraZeneca (LSE: AZN) (NYSE: AZN.US), the global pharmaceutical company. All figures for the company are courtesy of S&P Capital IQ.
A bargain?
The consensus for 2013 is for a normalised EPS of 333p (519 US cents), which puts the 3,183p shares on a forward P/E of 9.6. To put that into some perspective, at its current level of 6,510 the FTSE 100 is trading on a P/E of around 16.
So, if you believe the company will start to deliver better earnings over the next few years, a P/E of 9.6 might suggest that AstraZeneca is a bargain that the market is missing.
Or declining prospects?
However, City analyst estimates suggest that earnings may fall to 318p (495 US cents) per share in 2014, falling further to 312p (486 US cents) for 2015, and sinking to just 274p (427 US cents) in 2017.
Such forecasts imply that the current P/E of almost 10 reflects the anticipated decline in earnings, rather than any fundamental underpricing of the company.
The data from S&P Capital IQ also indicate total revenue at AstraZeneca will fall from 2012’s $28bn to only $22bn by 2017 and that EBITDA will decline sharply to just $7.6bn in 2017, which would be a drop of nearly 40% from last year’s £12.3bn.
All told, the forecasts seem pessimistic, with earnings set to fall significantly over the next few years, with that pessimism reflected by that 9.6 near-term P/E ratio.
What next?
Whether these projections make AstraZeneca a buy, a hold or a sell is, of course, up to you.
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> Jon does not own any share mentioned in this article.
